Currency Competition in a Fundamental Model of Money

We study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The currencies\u27 equilibrium values, their transaction velocities and agents\u27 spending patterns are endogenously determined. We derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. We also examine when the reverse spending pattern is optimal. Traders generally favor dealing in the safe currency, unless trade frictions and the currency risk is low. As risk increases or trading becomes more difficult, the transaction velocity and value of the safe money increases